The latest fall in global share markets has its genesis in China where at last the central government appears to be taking the foot off the accelerator. But the market weakness obscures one the biggest fundamental changes taking place in global markets — China is about to emerge as the major global equity investor. More of that later.

None of the US and European danger points (US stimulus, European banks, the Middle East, etc) are currently seriously erupting. But Chinese sharemarkets are weak led by a 2.3% fall in Shanghai yesterday and driven by increasing fears that the Chinese are getting serious about their inflation and the fact that to avoid the global financial crisis they over stimulated their economy.

And in commodity markets any China slowdown is multiplied by the vast number of traders so we have a sea of red on the price boards.

Inflation is deep seated in China. For example, the Chinese have some 64 million dwellings unoccupied as people hold them expecting in part that they will rise faster in value if they are not occupied. That’s a lot of capital tied up looking for inflation.

The China Electricity Council estimates that the country will likely face electricity shortfalls of about 30 gigawatts this summer and the supply gap could expand further if weather and thermal coal supplies are unfavourable. While that’s not a vast amount it means they will need all the coal they can buy. China’s power company shares have been going against the market on speculation that one way to lessen the shortfall is to lift the price of electricity, which in turn will lift the power generators profitability — or, at least, that’s the reasoning of the Shanghai speculators.

But electricity price rises will also cause social disruptions which Chinese authorities fear will get out of control.

China is of course erecting vast numbers of coal and nuclear power stations to overcome these shortages but in the short-to-medium term China’s inflation rate is set to stay above 5% without serious action. Our big iron ore and coal miners say it is going to take three or four years to increase overall capacity to match Chinese demand and they therefore believe they have three or four years of strong underlying demand and good prices ahead.

The Chinese sharemarket would need to decline a lot further before the miners’ belief — which will underpin the Australian budget forward forecasts — is proved wrong.

But as we look ahead, after so many years when China absorbed vast amounts of the world’s capital, a study commissioned by the Asia Society in New York and the Woodrow Wilson Center for International Scholars in Washington, forecasts that over the next decade China could invest as much as $US2 trillion in overseas companies, plants or property.

The Asia Society says that money could help reinvigorate growth in the United States and Europe although the strong anti-China feeling in the US could mean Americans miss out. Last year, China’s overseas direct investments amounted to about $59 billion. By comparison, the US invested more than $300 billion.

But with Beijing pushing its big companies to go overseas and invest in resources and technology, China’s investments could soon reach $100 billion to $200 billion a year, according to the Asia Society study.

Australia is going to be a major area of Chinese investment in mining, agriculture and tourism.

*This first appeared on Business Spectator.